Agora Industry

The climate-neutral transformation of industry is a necessary step on the path to net zero by mid-century.

The industrial sector is the largest emitter of energy- and process-related emissions, and also relies on widely distributed global supply chains. These factors pose unique challenges for the climate-neutral transformation of industry. The need for change is particularly acute in the energy-intensive subsectors of steel, chemicals and cement. Indeed, national, European and global climate ambitions all hinge on the adoption of climate-friendly production processes for these basic materials. To be sure, the transformation of industry also presents distinct opportunities, as it can be an important catalyst of broader decarbonisation, undergirding the development of a renewable hydrogen economy while also advancing carbon capture, utilisation and storage technologies.

Production plants for basic materials have extremely long lifespans. The next major investments by industrial actors will have thus a decisive impact on the achievement of climate neutrality by mid-century. This highlights the need for rapid and resolute political action that harnesses a range of policy instruments, including well-designed regulations; targeted tax and subsidy policy; and market incentives.

Transforming production processes will not be enough. Underlying energy and raw material inputs must also become compatible with climate neutrality. Accordingly, the climate-neutral transformation of industry has important implications for global supply chains. Closely related supplemental challenges include the development of global markets for climate friendly products and the closing of material loops.  

Core results

  1. 1

    Regaining Europe’s energy sovereignty requires the frontloading of investment in energy efficiency and the more rapid deployment of wind and solar PV.

    Speeding up the reduction in fossil gas consumption with investment in buildings and industrial plants, as well as in district heating, renewables and power grid expansion, will add €40 billion per year to the EU-wide public green spending needs in 2022–2027.

  2. 2

    European solidarity calls for enabling all EU countries, including those with limited fiscal capacity, to deliver the RePowerEU Plan – which will require additional EU funding of €100 billion (€80 billion in grants, €20 billion in loans).

    Using the existing Recovery and Resilience Facility (RRF) for this purpose would make funds available in the 2022-2027 timeframe and allow – together with the unused RRF loans – to scale up investment quickly.

  3. 3

    Member States should review current spending plans for EU funds and minimise grant support while maximising the use of alternative financing support instruments.

    However, the current EU budget (2021–2027) only allows for marginal adjustments and does not offer sufficient funding for all types of investment needed to deliver the RePowerEU plan.

  4. 4

    The top-up to the Recovery and Resilience Facility can be financed with revenues from other climate instruments.

    One plausible option for financing the additional debt service of €2.9 billion per year in 2028–2058 is to use a share of revenues from carbon pricing, including the proposed ETS for transport and buildings.

From study : Delivering RePowerEU
  1. 1

    The current energy crisis makes it imperative to reduce the EU’s dependency on fossil fuels and imported raw materials.

    Industrial production of virgin plastics, steel, aluminium and cement alone accounts for 13 percent of yearly energy consumption and 581 Mt of annual emissions. The EU also imports very large amounts of gas, oil and coal to produce plastics and other energy intensive materials.

  2. 2

    Enhanced recycling and greater material efficiency hold enormous untapped potential for the transition to a fossil free production of energy-intensive materials, in both the short and long run.

    With ambitious policies, annual EU industrial emissions could be reduced by up to 10 percent (70 Mt) until 2030 and by 34 percent (239 Mt) until 2050 compared to 2018 levels. Plastics production alone could avoid using fossil fuels equivalent to roughly 2.7 billion cubic metres of gas and 149 million barrels of oil annually by 2030.

  3. 3

    Realising these abatement and savings potentials must be a priority in the EU’s new Circular Economy legislation. To synchronise energy security and climate neutrality, this legislation must spur demand for high quality recycling while boosting collection and supply of high quality recyclates.

    Required policy instruments are expanded quotas for recycled content; investment aid for rapid deployment of innovative recycling technologies; as well as labelling and best practice mandates for collection, sorting, recycling and re-use.

  4. 4

    EU Member states can now implement key policy measures that effectively reduce greenhouse gas emissions already within the next 1 to 5 years.

    Examples are wider bans on single use and non-recyclable plastics, the implementation of deposit-refund schemes for plastic packages, investments into ex-post re-sorting and state of the art recycling practices.

  1. 1

    The current energy crisis makes it imperative to reduce the EU’s dependency on fossil fuels and imported raw materials.

    Industrial production of virgin plastics, steel, aluminium and cement alone accounts for 13 percent of yearly energy consumption and 581 Mt of annual emissions. The EU also imports very large amounts of gas, oil and coal to produce plastics and other

    energy intensive materials.

  2. 2

    Enhanced recycling and greater material efficiency hold enormous untapped potential for the transi-tion to a fossil free production of energy-intensive materials, in both the short and long run.

    With ambitious policies, annual EU industrial emissions could be reduced by up to 10 percent (70 Mt) by 2030 and by 34 percent (239 Mt) by 2050 compared to 2018 levels. Plastics production alone could avoid using fossil fuels equivalent to roughly 2.7 billion cubic metres of gas and 149 million barrels of oil annually by 2030.

  3. 3

    Realising these abatement and savings potentials must be a priority in the EU’s new Circular Economy legislation. To synchronise energy security and climate neutrality, this legislation must spur demand for high quality recycling while boosting collection and supply of high quality recyclates.

    Required policy instruments are expanded quotas for recycled content;

    investment aid for rapid deployment of innovative recycling technologies; as well as labelling and best practice mandates for collection, sorting, recycling and re-use.

  4. 4

    EU Member states can now implement key policy measures that effectively reduce green-house gas emissions already within the next 1 to 5 years.

    Examples are wider bans on single use and non-recyclable plastics, the implementation of deposit-refund schemes for plastic packages, investments into ex-post re-sorting and state of the art recycling practices.

  1. 1

    The escalation of Russia’s war against Ukraine has created a fossil energy crisis and has exposed the EU’s dependency on fossil gas imports. If the EU fully mobilises all available means to reduce energy demand and switch to renewable energy, Europe can regain its energy sovereignty by 2027.

    Energy efficiency in buildings and industry as well as a fast ramp up of wind and solar PV can permanently reduce fossil gas demand by 1200 terrawatt hours in the next five years, allowing to avoid 80% of today's Russian gas imports and enabling a 100% displacement when combined with alternative supplies such as LNG.

  2. 2

    Climate protection and energy security go hand in hand, as actions to meet the EU climate targets also reduce fossil gas consumption.

    Until 2027, energy efficiency, district heating and a heat pump revolution can save 480 TWh in buildings; efficiency and electrification in low and medium temperature heat processes can provide for 223 TWh savings in industry, and a ramp up of wind & solar PV combined with more system flexibility will contribute 500 TWh in the power sector.

  3. 3

    Regaining Europe’s energy sovereignty by 2027 requires a collective European effort based on joint commitments and solidarity.

    The RePowerEU plan needs to mobilize the reductions identified in this study. Similar to the COVID recovery efforts, the plan must be embedded in a strong political framework overseen by the European Council to ensure its swift and full implementation. Helping Ukraine build back better after the war should be part of the efforts.

  4. 4

    A new EU Energy Sovereignty Fund, modelled on NextGenEU and equipped with 100 bn EUR until 2027, should be set up as part of a dedicated investment framework to deliver RePowerEU.

    The framework also needs to ensure that existing EU funds are re-purposed wherever possible and governments smartly combine price signals and protection for poor households and industry.

  1. 1

    The EU will establish a Carbon Border Adjustment Mechanism (CBAM) that will apply to power imported from neighbouring countries, including the Western Balkan region.

    The CBAM is a necessary tool for the EU to prevent carbon leakage; it is not an instrument to force trading partners to adopt similar policies.

  2. 2

    The Western Balkan countries have the EU as their main trading partner. They should prepare for its entry into force by either adopting internal carbon pricing or establishing clear pathways to enter the EU ETS.

    Export markets for goods with high carbon intensity will shrink, impacting the region far beyond the power sector. The CBAM will to some extent also reduce opportunities to export carbon free flexible power generation. There is a tight timeline concerning the numerous re-forms that must take place before 2030.

  3. 3

    Plans for new lignite power plants in the Western Balkans should be halted.

    Such projects will be loss-making in context of the CBAM. Establishing domestic carbon pricing will assist countries in gathering revenues that should be used to fund the transition to clean power systems.

  4. 4

    The EU should commit to use CBAM revenues for technical assistance and transfer of knowledge to countries developing carbon pricing.

    Specific support is needed for establishing the data and technical backbone of carbon pricing systems. In addition, the West-ern Balkan countries should use a larger share of available EU funds for supporting a just transition and socio-economic convergence with the EU.

  1. 1

    Under the EU’s higher climate ambition, the current system of free CO2 allowances is no longer sustainable to protect against carbon leakage.

    The EU will need to start phasing in an alternative system to protect EU energy intensive industries before 2030, though not in all sectors. This new system must protect against leakage and also incentivise industry to start decarbonisation during the coming decade.

  2. 2

    A CBAM is the most credible alternative to free allocation.

    The proposed “climate club” may have value as a complement to a CBAM, but it is not a credible stand-alone option. Similarly, consumption charges also raise numerous practical and political difficulties that are difficult to resolve, discounting them as a viable alternative to a CBAM.

  3. 3

    A cautious and gradual phase-in of a CBAM would accelerate industrial decarbonisation provided that it is accompanied by support for key low-carbon technologies.

    It would promote carbon cost pass-through along the value chain, incentivising recycling and the move to lower-carbon materials; it would allow the EU to raise vital funds to finance Carbon Contracts for Difference; and it would help to incentivise cooperative climate action on carbon leakage internationally.

  4. 4

    An effective CBAM must also give adequate protection for exporters.

    We suggest a two-step approach to this question, including a slightly slower phase-in rate for auctioning prior to 2030, coupled with the prioritisation of decarbonisation support for abatement. This could be followed by a review of the risks to exporters in 2029 based on emerging international action. In a worst-case scenario, a freeze in the phase-down of free allocation to exported production could be considered once CBAM was well established as a policy and risks of retaliation have reduced.

  1. 1

    There is an emerging consensus that the role of hydrogen for climate neutrality is crucial but secondary to direct electrification.

    By 2050, carbon-free hydrogen or hydrogen-based fuels will supply roughy one fifth of final energy worldwide, with much of the rest supplied by renewable electricity. Everyone agrees that the priority uses for hydrogen are to decarbonise industry, shipping and aviation, and firming a renewable-based power system. Therefore, we should anchor a hydrogen infrastructure around no-regret industrial, port and power system demand.

  2. 2

    Financing renewable hydrogen in no-regret applications requires targeted policy instruments for industry, power, shipping and aviation.

    This is critical for incentivising hydrogen use where carbon pricing alone cannot do the job quickly enough. While policy options are available at a reasonable cost for industry, power and aviation, there is no credible financing strategy for hydrogen use by households. Blending is insufficient to meet EU climate targets and carbon prices high enough to deliver hydrogen heating would be unacceptable for customers.

  3. 3

    Gas distribution grids need to prepare for a disruptive end to their business model, because net-zero scenarios see very limited hydrogen in buildings.

    To stay on track for 1.5C, Europe needs to reduce consumption of natural gas in buildings by 42 percent over the next decade, as per the EU Impact Assessment. Similarly, land-based hydrogen mobility will remain a niche application. Any low-pressure gas distribution grids that survive will be close to ports, where refuelling and storage infrastructure could provide an impetus for the decarbonisation of the maritime and aviation sectors.

  4. 4

    Europe has enough green hydrogen potential to satisfy its demand but needs to manage two challenges: acceptance and location of renewables, as each GW of electrolysis must come with 1-4 GW of additional renewables.

    To keep industry competitive, the EU should therefore access cheap hydrogen (green and near-zero carbon) from its neighbours via pipelines, reducing transport cost. Imports from a global market will focus on renewable hydrogen-based synthetic fuels.

From study : 12 Insights on Hydrogen
  1. 1

    The global steel sector is at a crossroads. Before 2030, 71% of existing coal-based blast furnaces (1090 Mt) will reach the end of their lifetimes and require major reinvestments.

    Meanwhile, emerging economies with rising steel demand will require at least 170 Mt of new capacity. Meeting these needs with coal-based capacity will create long-term carbon lock-in and lead to stranded assets, endangering jobs and putting any pathway compatible with 1.5°C out of reach.

  2. 2

    The global steel transformation needs to start in the 2020s. Key low-carbon technologies are ready and can be deployed now.

    The project pipeline of green steelmaking capacity that will come online before 2030 is growing rapidly. 40 Mt of direct reduced iron (DRI) capacity is already planned and many operators have announced that they will switch to secondary steel production. Retroactive post-combustion CCS for coal-fired blast furnaces may be a dead-end road.

  3. 3

    Aligning the steel sector with a 1.5°C compatible scenario needs to put the asset transition from coal to clean at its core.

    The best strategy from now on is to avoid reinvestments into blast furnaces by prolonging life-times of old assets by 2-5 years and after 2025, invest into DRI directly. By 2030, the global steel sector would require 390 Mt of DRI capacity and 278 Mt of additional secondary steel capacity. This is feasible – and would save the atmosphere 1.3 GtCO2 per year.

  4. 4

    A single-speed global steel transformation can bring enhanced international cooperation and a level playing field.

    Steel is a globally traded commodity. The sector’s transformation will require international coop-eration. Meeting the asset transition targets would transition some 1.3 million existing jobs in the steel industry from coal-based to future-proof green jobs while creating 240,000 new green jobs in emerging economies.

From study : Global Steel at a Crossroads
  1. 1

    Given the new paradigm of achieving climate neutrality by 2050, current climate and industry policies will lead to investment leakage or risk stranded industrial assets.

    Industrial companies understand: The EU objective of climate neutrality by 2050 has clear implications for industrial reinvestment in the 2020s. Carbon-intensive technologies have lifetimes of up to 70 years. Reinvestments into long-lived assets will not be made unless there is an investment framework to deploy climate-neutral technologies.

  2. 2

    With a new policy framework, the basic materials industries can support an increased EU 2030 climate target of at least -55 per cent. Key low-carbon technologies are available and can be deployed well before 2030.

    The CO2 abatement potential of key low-carbon technologies in the steel, chemicals, and cement sectors alone amounts to 145 Mt of CO2 by 2030, exceeding the required emission reductions from industry under the EU ETS. Their deployment will represent a breakthrough in Europe’s industrial sector and ensure it a leading global role.

  3. 3

    By 2030, 30 to 50 per cent of existing assets in cement, steel, and chemicals will require major reinvestment. New policies are needed now to create a business case for breakthrough technologies.

    Key low-carbon technologies are available, but their abatement costs are still in the range of 100 to 170 €/t of CO2. The EU should adopt policy instruments to cover the gap between these abatement costs and the EU ETS price as soon as possible.

  4. 4

    Europe needs a Clean Industry Package in 2021 to kick-start breakthrough investments and protect existing assets.

    By refining existing carbon leakage protection instruments it will be possible to protect existing plants until they can be replaced. At the same time, decisive support for investments in breakthrough technologies is needed. This should come in the form of carbon contracts-for-difference, planning and financing for clean-energy installations and infrastructure, and standards to create markets for climate-neutral and circular products.

  1. 1

    Europe’s energy intensive industry must make a significant contribution to achieving the EU’s new target to reduce greenhouse gas emissions by 55% by 2030.

    The CO2 abatement potential of key low-carbon technologies in the steel, chemicals and cement sectors amounts to 145 Mt of CO2 by 2030. The European Council of 10-11 December 2020 thus explicitly tasked the Commission to “propose measures that enable energy intensive industries to develop and deploy new climate neutral technologies while maintaining their industrial competi-tiveness”.

  2. 2

    The Commission’s 2021 Work Programme currently does not foresee developing a coherent and integrated policy package for climate neutral industry.

    While the Commission has addressed some aspects (e.g. hydrogen strategy, ETS and carbon leak-age reform), key elements are still missing, such as policies to create lead markets for low carbon basic materials or incentives for material-efficient and circular construction and manufacturing.

  3. 3

    Enabling the necessary investments at scale requires a robust and consistent framework at the European and national level well before 2030.

    To this end, key elements of the “Fit for 55 package” must be connected to crucial initiatives for industrial decarbonization such as the Circular Economy Action Plan, Sustainable Products Initia-tives, mandatory use of the LEVEL(s) framework or Green Public Procurement opportunities.

  4. 4

    By latest April 2021, the European Commission should present an update of its industrial strategy.

    The updated strategy should: a) present a compelling and concrete narrative for how energy-intensive industry can transform by 2030 and 2050; b) set concrete and ambitious 2030 mile-stones for that industrial transformation; and c) include a legislative roadmap with specific instru-ments for delivering the milestones to kickstart the transition.

  1. 1

    Given the new paradigm of achieving climate neutrality by 2050, current climate and industry policies will lead to investment l eakage or risk stranded industrial assets.

    Industrial companies understand: The EU objective of climate neutrality by 2050 has clear implications for industrial reinvestment in the 2020s. Carbon-intensive technologies have lifetimes of up to 70 years. Reinvestments into long-lived assets will not be made unless there is an investment framework to deploy climate-neutral technologies.

  2. 2

    With a new policy framework, the basic materials industries can support an increased EU 2030 climate target of at least -55 per cent. Key low-carbon technologies are available and can be deployed well before 2030.

    The CO2 abatement potential of key low-carbon technologies in the steel, chemicals, and cement sectors alone amounts to 145 Mt of CO2 by 2030, exceeding the required emission reductions from industry under the EU ETS. Their deployment will represent a breakthrough in Europe’s industrial sector and ensure it a leading global role.

  3. 3

    By 2030, 30 to 50 per cent of existing assets in cement, steel, and chemicals will require major reinvestment. New policies are needed now to create a business case for breakthrough technologies.

    Key low-carbon technologies are available, but their abatement costs are still in the range of 100 to 170 €/t of CO2. The EU should adopt policy instruments to cover the gap between these abatement costs and the EU ETS price as soon as possible.

  4. 4

    Europe needs a Clean Industry Package in 2021 to kick-start breakthrough investments and protect existing assets.

    By refining existing carbon leakage protection instruments it will be possible to protect existing plants until they can be replaced. At the same time, decisive support for investments in breakthrough technologies is needed. This should come in the form of carbon contracts-for-difference, planning and financing for clean-energy installations and infrastructure, and standards to create markets for climate-neutral and circular products.

  1. 1

    By 2030, between 30 and 53% of cement, steel and steam cracker plants in the EU27 will require major reinvestments.

    Based on existing policies, there is no credible business case to make investments that are compatible with climate neutrality by 2050. As a result, the EU faces a serious risk either of plant closures and job losses or the lock-in of CO2-intensive technologies.

  2. 2

    EU ETS carbon prices and a carbon border adjustment will not be enough to create a business case for key low-carbon technologies before 2030.

    Many “breakthrough” technologies will require carbon prices on the order of 100 to 170 €/tCO2 if they are to be competitive. To make these technologies economically viable, supplementary policies such as carbon contracts-for-difference will be needed..

  3. 3

    In 2021, the Commission needs to propose a clean industry package of genuinely transformative policies, unlocking investments in the upstream, midstream and downstream segments of the value chain.

    The package should include carbon contracts for difference; planning and financing tools for clean-hydrogen infrastructure in industrial clusters; free ETS certificates and protection against carbon leakage; and standards to create markets for climate-neutral and circular products.

  4. 4

    Europe must begin to transform its industrial sector even before EU legislation is passed.

    Member states can accelerate economic recovery in the short term by supporting investments in industrial decarbonisation. With comprehensive clean-industry legislation, the EU can drive investment in lowcarbon transformation and create economic resilience in the medium term.

  1. 1

    The basic materials industry is facing a major challenge: it must make a 25% reduction in emissions by 2030 and achieve near zero emissions by 2050 – but emission levels have remained constant over the last ten years.

    Breakthrough innovations are thus needed to enable the climate-neutral production of steel, chemicals and cement. Gradual efficiency improvements remain important, but they are no longer sufficient.

  2. 2

    The technologies needed for climate-neutral industry are already available – or are close to market readiness.

    Green hydrogen will play a central role in achieving carbon neutrality in the steel and chemical industries. Particularly in the chemicals industry, the closing of material loops will be a core strategy. In the cement industry, new binders and carbon capture and storage (CCS) will be key technologies.

  3. 3

    Industry needs a new regulatory framework over the short term, as a major reinvestment phase will occur between 2020 and 2030. Promising political instruments include Carbon Contracts for Difference (CfD), a green hydrogen quota, and a green public procurement commitment by the federal government.

    With the right mix of policy instruments, the German government can ensure reliable conditions for investment while also incentivising behaviour at various levels of the supply chain: upstream, midstream and downstream. By contrast, continued investment into conventional technologies risks stranded assets, as new industrial plants have lifespans well beyond 2050.

  4. 4

    The future of German industry must be climate-neutral. Germany now has the opportunity to become a technology leader in key low-carbon technologies with a significant potential upside.

    By ushering in climate-neutral industry at home, Germany could help to demonstrate the viability of a climate-neutral industry and thereby help to foster a global market for low-carbon technologies worth billions.

  1. 1

    Wholesale spot power prices are on the decline in many parts of Europe, and are lowest in Germany and Central Eastern Europe (especially in Poland and the Czech Republic). Meanwhile, prices have been rising in the US.

    Since 2011, spot prices have been decreasing in Europe, except for in the UK, Belgium and the Netherlands. While spot prices in Germany were higher than in the US during 2010-2012, in 2013 they fell below the New York ISO prices, and converged with those of other US regions. In many other European markets, the gap with US prices remains significant.

  2. 2

    Wholesale market prices can serve as a starting point for comparing the energy costs of European industries, especially energy-intensive industries. Nevertheless, this approach has inherent limitations:

    (1) Wholesale prices don’t necessarilyaccurately reflect the “energy component” of prices paid by end users, due to differences in purchasing strategies, longtermcontracts and potential price regulation; (2) Several additional components must be taken into account as well (gridtariffs, renewable levies and other taxes), from which industrial actors may receive partial or full exemptions.

  3. 3

    While numerous European companies have complained of market distortion due to regulatory favouritism for Germany’s energy-intensive industries,...

    ...caution must be exercised when attempting to directly compare industrial end-use pricesbetween countries and sectors. Against the backdrop of decreasing wholesale prices and increasing exemptionsfor energy-intensive consumers in Germany, several EU member states have argued that domestic regulations inGermany create market distortions that unduly favour German firms. Because firms in different regions and sectorsvary considerably in the extent to which they pay wholesale market prices and/or receive tax exemptions and levyreductions, comparing prices between sectors and countries is a difficult task. The heterogeneity of the situation is notfully and transparently captured by European statistics.

Projects

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